The Power of Perspectives

Licensed to know

An ‘unproven model’ offers opportunities for patent buyers and sellers, as well as law firms.

Illustration by Robert Johannsen

Intellectual property is the backbone of innovative companies. It can also be used as both weapon and shield in patent battles, as recent and much-publicized infringement suits against RIM, Samsung and Google can attest.

While a growing chorus of critics has de­­plored such litigiousness — it ultimately hinders innovation, they say, by diverting massive resources into fending off frivolous patent claims — there is now cautious optimism among companies that a new exchange will soon offer them protection against competitors and patent trolls.

The Chicago-based Intellectual Property Exchange International (IPXI) is expected to go to market with its first public offerings by November. By acting as a marketplace for the trading of non-exclusive licensing rights, it will allow participating companies to buy, sell and hedge patent rights listed on the exchange.

According to Sasha Mandy, a Montreal IP lawyer with Robic LLP, companies worried about bringing to market products that may infringe on existing patents will want to see if IPXI offers a patent that will give them cover. “It’s like an insurance that can potentially avoid expensive litigation,” he says. “And it avoids lawyers’ costs if you want to approach a company directly to buy a patent. It is a much cheaper option than going through a lawyer to get an exclusive licence or other two-party licence.”

IPXI’s proponents also say that the exchange allows owners to unlock the value of their IP assets. “This is another alternative to try to commercialize technology to generate money that we can put back into our business,” says Chris Danowski, director of technology commercialization at Ford Global Technologies LLC, one of IPXI’s corporate founding members. “We also see this as another way of approaching other industries that, traditionally, we haven’t been able to tap before.”

A new kind of market…

Over the years, IP-knowledge markets have seen international royalty and licensing fee receipts skyrocket from US$2.8-billion in 1970 to US$27-billion in 1990, and to approximately US$180-billion in 2009, according to the World Intellectual Property Organization. And yet firms typically license less than 10 per cent of their patents. More companies would license their technologies but few marketplaces exist that bring buyers and sellers together. New intermediaries, such as auctions, brokerages and IP clearinghouses that facilitate technology transactions, have surfaced in recent years, with mixed results. IPXI proposes a new model to buying and selling intellectual property.

"It’s a great concept generically but practically there are a lot of impediments to treating patents like other commodities on exchanges…"
Michael MansonSmart & Biggar/ Fetherstonhaugh, Vancouver

First announced with a brief splash three years ago, it took IPXI well over 18 months before it was able to convince a group of U.S. and European investors, including CBOE Holdings Inc. and electronics giant Royal Philips Electronics, to finance the exchange. Gerard Pannekoek, IPXI’s president and CEO, himself admits that it is “an unproven model.”

The new exchange will work much like an emissions cap-and-trade system by offering a group of patents as unit licence rights (ULRs), where purchasers acquire a limited right to use a patented technology.

So if a company wants to use a patented piece of technology in 100,000 widgets, it would then buy 100,000 ULRs at market price. ULRs that are no longer needed can be later traded on secondary markets. Sophisticated investors will also be able to purchase ULRs to speculate on their value.

Some offerings will involve only U.S. patents while others will include foreign patents. So far, more than $500 million in ULR contracts have been pledged to the exchange from founding member companies, including Philips Electronics, Sony Corporation of America, and several American universities and research laboratories. The exchange is currently evaluating additional submissions of IP portfolios for ULR offerings.

At first glance, IPXI appears to have the potential to transform the way companies typically negotiate patent licences. Lawyer-intensive and time-consuming, the traditional bilateral licensing model involves tracking down an IP for licence, identifying potential licensees, determining or defending patent validity, negotiating the terms of the licences, and then policing consumption and auditing royalties to ensure compliance.

Even then the market for patents is opaque, as it is difficult to ascertain the value of the IP, its quality or its uptake. Pannekoek says that IPXI circumvents these “inefficiencies” by providing transparency to the marketplace. Due diligence is performed before accepting any IP on the exchange. He says the ULR model will further reduce legal costs for both licensors and purchasers thanks to its standardized, exchange-based offerings of licence rights, according to IPXI documents.

Pannekoek is careful to point out that the legal profession will still play a key, albeit different, role in IP transactions. “This exchange will offer significant new legal opportunities for law firms because our clients and our members will be looking for advice on how to bring this to market and on how to structure it,” says Pannekoek. “While we at IPXI can provide part of that advice, every IP owner should turn to their outside counsel and have them be involved as well.”

…For a specific kind of patent

Among patent lawyers there is lingering skepticism that IPXI will make a dent in the traditional bilateral licensing model.

Even though he says an exchange for patent rights is long overdue, Mandy has his reservations about IPXI’s potential on account of its select and exclusive nature. IPXI, much like the Chicago Board Options Exchange and the New York Stock Exchange, is membership-based. Though no commitment is required to issue ULR contracts, it is required to sponsor one. The listing fee — a hefty $100,000 — is a formidable barrier for many companies. “It’s just not as open as it may be,” says Mandy. “To be a sponsor you have to apply and it is an expensive process.” At launch time, he says, making patents available on the exchange “will be limited to a very select number of companies, academic institutions and laboratories.”

Pannekoek makes no apologies for the listing fee. He claims that the amount represents a “very small fraction” of the costs IPXI incurs while performing due diligence of patent submissions, and marketing and transaction expenses. Be­sides, the listing fee “is effectively one additional measure to help ensure that quality patent portfolios will be offered on the exchange,” says Pannekoek. “IPXI will not be a marketplace for rent-seeking or testing patents with questionable validity or derivable value.”

“It’s a great concept generically but practically there are a lot of impediments to treating patents like other commodities on exchanges because nationally defined rights are in play,” says Michael Manson, a partner at Smart & Biggar/ Fether­stonhaugh in Vancouver. Rules surrounding the granting of patents, the requirements placed on patentees, and the extent of their exclusive rights vary widely from one country to the next. And remedies available for patent infringement also differ across borders. “Patent rights, by their inherent nature, are limited in scope, in time, and in the ability to enforce them territory by territory,” says Manson.

Jurisdictional differences aside, patent licence agreements also tend to be forged to meet unique circumstances. “Depending on what a licensee is going to bring to the table and what they are looking for, the terms of the licences are going to be different,” says Manson, who sees IPXI as just an alternative vehicle for licensing.

It is also unlikely that the rights to high-value patents — the sort developed by biotech or pharmaceutical industries for instance — will ever be exchanged at IPXI as patent holders would hardly consider licensing non-exclusive rights on standardized terms after spending hundreds of millions of dollars in the development of their products.

Lower-value patents, on the other hand, can be useful but not necessarily worth a whole lot, says Richard Gold, a McGill University law professor. “It’s the type of stuff that companies just want to monetize without having to spend lots of time investing in finding the right licensee or spend a lot of time enforcing.”

Ultimately, the vast majority of patents won’t be appropriate to be listed on IPXI, says Cheryl Reicin, a partner at Torys LLP in Toronto. Indeed to meet IPXI quarterly reporting requirements, IP assets offered on the exchange must be measurable and quantifiable. Those ac­quiring a licence must report on a quarterly basis units made under the licensing agreement, and the exchange has the right to audit those numbers. Those figures are important because it shows adoption of technology which could be a key driver for the price of the ULR. “You need to find a licence you can actually measure when it is being used up, which isn’t so easy,” says Reicin.

Pannekoek is hardly surprised by some of the skepticism surrounding the launch of IPXI. The Dutch native has heard it before. He was the founding president of the Chicago Climate Exchange, the world’s first multi-national and multi-sector market for reducing and trading greenhouse gas emissions. And just as it was with the Climate Exchange, Pannekoek anticipates industry buy-in and adoption for IPXI to be slow. “There has not been one tradable product in the history of exchanges that had rapid liquidity or rapid activity,” observes Pannekoek. “Even the most successful futures contract like the Eurodollar contracts started very slow. The carbon market started very slow. I expect the same thing to happen with our exchange.”

Time will tell. For now, says Gold, “the IP exchange is one relatively small, but not necessarily unimportant, part of the entire movement of how we get people to move knowledge about.”

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